Post-pandemic tax audit hurdles

Since then, progress has been slow, but there are signs that the CRA’s auditing activity is ramping up.

“It’s not that the CRA has been inaccessible, but there have been delays,” says Nicole Lynx, senior manager, tax controversy, at BDO Canada LLP in Toronto. Heading into September, Lynx still was waiting to hear back from many CRA auditors. She says she often had to initiate conversations with auditors as they adjusted to working from home.

By mid-September, Lynx says the CRA was more responsive. “Particularly, I have encountered an uptick in audits being categorized as low-risk and closed without change, as well as appeals being resolved more expeditiously,” she says.

Usually, major CRA audits are conducted in person, with an auditor either visiting someone’s home or office, or requiring that the person being audited deliver documents to a CRA location. When documents were sent electronically, the agency always requested that its secure online tools be used because email is considered too risky.

Cyber-risk is the main reason for the CRA’s insistence on secure document transfer, Lynx says. “In order for the CRA to correspond over email or [by] cellphone, [the agency] requires verbal or written consent from the taxpayer acknowledging that such communications could be intercepted by a third party,” she says.

In September, CRA spokespeople stated that while email communication is available and staff have been trained in sending secure electronic communications, the CRA still prefers to use its online services or regular mail for exchanging sensitive information.

Since the CRA updated its procedures, Lynx has been using the agency’s secure online client portals to upload simple letters and make requests.

Marc Lebrun, the CRA’s deputy assistant commissioner, added in a separate email that a small portion of the CRA’s workforce isn’t able to work remotely and “additional steps to navigate physical risks will be taken” if a taxpayer requires face-to-face meetings with an auditor.

The CRA states that it will adjust its processes “throughout the fall and winter,” adding that the agency is open to providing flexibility on deadlines for submitting supporting documentation. The agency also states that it will “monitor client service pressures, as well as emerging compliance risks, to confirm or adjust national start dates of our compliance programs.”

Peter Weissman, partner at Cadesky and Associates LLP in Toronto, isn’t optimistic about the road ahead. “The audit and appeal process was backlogged before Covid-19 came in — for a number of years,” he says. “But now, with all of the additional audit activity that’s going to go on with the [Canada Emergency Wage Subsidy], for example, the CRA is going to have the same resources but a lot more to audit.”

Lebrun says the CRA has not hired extra employees so far. Instead, “existing resources and expertise” are being deployed and trained in matters such as “legislation, payroll validation, audit techniques and systems used to conduct reviews/audits.”

Weissman noted in late August that some of his clients with “pretty significant appeals on the go” had them put on hold earlier in the year. Communicating with auditors historically has been challenging under the best of circumstances, he says, with “very little back and forth.”

Lynx, whose clients typically are small and medium-sized businesses, says that when an audit is ongoing, a company must set aside any funds it might owe to be applied to penalties and back taxes. Delaying progress on large audits “essentially [ties] up capital that could be used in other areas of business,” Lynx says. Delayed processes also can lead to increased audit expenses as business owners try to keep track of relevant documentation and transactions.

If your client is stressed about an audit, Weissman suggests pushing for updates from the CRA: “There’s sometimes been reluctance from an auditor to get involved in person-to-person dialogue, and documenting [your efforts] will help if you have to go to appeal.”

Lynx gives the CRA credit for being “very pro-taxpayer through all this,” but advises you and your clients to keep detailed notes during an audit. “The most difficult thing for someone working in tax controversy is when there’s limited documentation or you’re brought in too late in the audit process,” she says.

Canada Emergency Wage Subsidy audits draw ire

After the Canada Revenue Agency (CRA) resumed audits in May, it focused on those that are significant, near completion or time-sensitive. Now, the agency wants to widen the scope of its auditing as it resumes full activity. The CRA also began the first phase of its Canada Emergency Wage Subsidy (CEWS) post-payment audit program.

Aaron Schechter, taxation partner at Crowe Soberman LLP in Toronto, says the initial audit requests regarding CEWS are “daunting.”

In September, Schechter posted on LinkedIn a copy of the CRA’s nine-page audit request template. The CRA document asks for details such as corporate minute books, organizational charts, two years of bank statements and employment contracts. The document is dated Sept. 11 and requested a large volume of information to be submitted by Sept. 28.

“In certain circumstances, the professional fees [incurred in] responding to the questionnaire may exceed the benefit the taxpayer received under the CEWS,” Schechter says.

Peter Weissman, partner at Cadesky and Associates LLP in Toronto, agrees that CEWS audit requests are onerous for businesses. “[The audit document] is outrageously detailed, contains a number of items businesses were never told would be required and has some questions that ask for information that is seemingly not relevant,” he says.

In an email to Investment Executive, a CRA spokesperson states the audit template includes “a full list of potential sources of information that may be relevant,” but that “auditors use their judgment and the list is tailored for each file.” Furthermore, the CRA is “seeking copies of information that should exist and would have been recently referenced in the preparation of the CEWS claim.”

The CRA also requires Canadian employers to provide additional information for the 2020 tax year to “validate payments” made under the pandemic benefit programs, including the CEWS. Employers will be required to report employment and retroactive payments on T4 slips for defined periods under new information codes.